Which of the following is least accurate regarding the limitations of the Black-

Question

Which of the following is least accurate regarding the limitations of the Black-Scholes-Merton (BSM) model? The BSM is not useful in

providing market concensus on expected volatility of the underlying.

pricing options when the short-selling and borrowing at the risk-free rate is constrained.

situations where the volatility of the underlying asset changes over time.

pricing options on bonds and interest rates.

providing market concensus on expected volatility of the underlying.

pricing options when the short-selling and borrowing at the risk-free rate is constrained.

situations where the volatility of the underlying asset changes over time.

pricing options on bonds and interest rates.

Explanation / Answer

c is correct.

BSM is based on an assumption of volatility of the underlying asset. When volatility in asset change over time, BSM is not very useful.

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